I recieved a good question about how the IRS applies payments on employment tax liabilities. The question was in response to my article and recent post about IRS trust fund investigations.
This is important.
If a business does not specifically designate the application of a payment on an employment tax liabilty, the IRS will apply the payment in its own best interest. That means the payment will be applied to non-trust fund taxes first, allowing the IRS more collection options. This will include the IRS pursuing collection of the trust fund taxes from the owners and select employees. The result: the non-trust fund taxes get paid by the business and others get assessed.
Internal Revenue Manual 22.214.171.124 provides that non-designated payments are applied as follows:
First, to the non-trust fund liability for the oldest payroll tax quarter
Second, to the trust fund liability for the oldest payroll tax quarter
Third, fees and collection costs
Fourth, assessed penalty followed by assessed interest
Fifth, accured penalty followed by accrued interest
To protect against this result, any voluntary payment on an employment tax liability should be specifically designated in writing to be applied to pay trust fund taxes first. This decreases the exposure of those behind the business of having to endure an IRS investigation and being held responsible for the trust fund taxes. These designations cannot be made with a required federal tax deposit or during an in-business installment agreement; only on voluntary payments.
But when things are quiet or hanging in the balance, work to reduce the personal liability first by designating voluntary payments to trust fund taxes.